Shahin Farshchi -- Lux Capital

Foreign.

Hello and welcome to the LA Venture Podcast. This is Minnie Ingersoll, host of the podcast and partner at 1011010110 is a seed stage fund here in LA. All opinions expressed on this show by me and my guests are solely our own. Shaheen Farshi is a partner at Lux Capital. Lux is a top VC fund with approximately two and a half billion under management. Lux invests in emerging science and technology ventures at the outermost edges of what is possible. Shaheen is an Engineer with a PhD in electrical engineering and believes in accelerating humanity towards a brighter future through feats of engineering. I love that. Shaheen, thanks for coming on the show today.

Great to be here, Minnie. Thank you for inviting me.

Awesome. Well, I usually like to start with the basics of Lux so our listeners get oriented on your current fun stage, that sort of thing.

Totally. So luxuried. Life in the bottom bust with the hypothesis that the next wave in great companies will be rooted in innovations in the sciences. And since then we've grown to invest across healthcare and technology. So now we have a team of about 10 investment professionals with backgrounds ranging from stem cell biology to physical chemistry to material science to myself having a background in electrical engineering and a lot of what I've done at Lux has been on side. So everything from basic semiconductors and communications technologies all the way to robotics, automation, autonomous cars and software tools.

Is this fund six for you folks?

This is fund six. So we are currently investing out of two pools of capital. One is a venture fund and the other is a growth fund. The growth fund is dedicated to doubling down on the winners out of the venture fund and we have about 20% of that set aside for investing in entry point growth companies. So check sizes can be typically around 10 to 15 million dollars out of the venture fund and double that for the growth fund.

Interesting. So I thought in your venture fund you still would call yourself entering at really early stages, right? I think you said sometimes there isn't, there aren't even paying customers, is that true?

Sometimes there isn't even the company. So on many occasions in fact too, over the past couple months we've invested in companies or behind people who have the expectation to start companies. So we've committed to being the first dollars in as soon as they choose to incorporate. And those have been amazing experiences for us as a firm and obviously turned out to be very personally rewarding for us because we feel like as if we have a role in the creation and hopefully the ultimate success in these companies by being part of them at their inception. In those scenarios, the checks may be a little bit smaller, it may be five to $10 million.

And so you're doing seed investing, maybe series A investing again out of the venture fund. But this is really pre seed. And is that distinct from the incubation efforts that you mentioned? You always are also doing so in.

Some occasions we do ideate companies. We've done that several times and it's something that we're very excited about, but that is distinct from getting behind entrepreneurs before there is a company. So there is the incubation of a company where one of us comes up with an idea and we put some people to work and we ultimately find people who would take over these businesses, where we recruit leaders to take over these businesses. I would put that in the incubation category. And then there is building relationships with top entrepreneurs and executives who are aiming to start companies. And we basically line ourselves up or position ourselves to be first money into those companies along with those entrepreneurs.

Has that changed for you? As you've seen deep tech get more trendy or more people coming into the.

Space, so these companies have certainly become more capital intense. So I think the motivation of founders to partner up with investors early has increased, knowing that rather than having to raise maybe, you know, 30, 40, $50 million to get to an exit, they'll have to raise hundreds of millions of dollars. So having a deep pocketed partner committed to the company on day zero is something that is perhaps more attractive to the entrepreneurs today than it was maybe several years ago.

So because I don't have a billion dollar fund, it's attractive to me to look at companies that are fairly capital efficient. Would you say that you almost have the opposite approach?

I think having to raise a lot of capital is necessary for a lot of these businesses. So for example, if you're building a autonomous car company, or if you're building a semiconductor company, or if you're building a communications company where there's an infrastructure component, then you certainly need to raise a significant amount of money. And so I wouldn't say that we seek companies that are super capital intense, but we've positioned ourselves to attract the very best people who are building these companies that are off the beaten path.

What do you think makes them most interested in working with you?

So founders look for people who can complement them, who bring skill sets that complement theirs. Just because a founder is doing something in semiconductors doesn't mean they should be talking to me at Lux. I have other partners at Lux that have seen these kinds of companies grow and probably would be better fits for those founders based on their personalities.

Well, then I'm dying to know what your personality and your style is, because, yes, if I were building a semiconductor company, I would probably come to you.

That's a good question. I think that's probably a better question for my founders. It goes back down to the humanity or the human aspect of this business. If this business was all about just money and Rolodex and connections, then it could be very much automated. And so I am the outcome or the product of my 15 years at Lux, having invested in deep tech companies, having seen these companies succeed and fail for many different reasons. And I think founders come to appreciate certain subsets of those experiences.

Do you think your style has changed?

Absolutely. So I entered the venture scene as a failed entrepreneur slash postdoctoral scholar trying to pay his bills in Los Angeles. And I observed so many extremely talented scientists and engineers either struggle to raise money or succeed in raising money, but struggle to generate an outcome that made money for their investors or for themselves. I came to appreciate how technology in itself isn't a value creator. I entered venture at a time when there was an investment strategy or an arbitrage opportunity that was starting to go away back in the late 90s, early 2000s. It feels like as if there was money to be made by simply licensing technology out of a university or out of a lab and wrapping it into a company. And there were buyers of that for something on the order of, let's say, the low hundreds of millions of dollars. That was a time when technology was not as complex, when taking a technology to a product didn't cost as much and didn't take as much time. And so there were far more willing buyers. Those times have changed. Right now you have to cut a larger check to get, you know, modest ownership and a company that needs to raise a significant amount of money, and there won't be an outcome that would be interesting for you unless it's in the billions of dollars. And so that has therefore changed the emphasis from technology to business, and technology simply being a means to an end. So what I spend a lot of time looking for is not just great assets, but thinking about how these assets, how these technologies can yield an unfair competitive advantage.

Well, let me point out a couple things in your background and maybe you can tell me more about it. So you have a strong background in autonomous vehicles, and you invested in Zoox extremely early, and they've been a lot in the news. Amazon's about to launch something. Can you tell me more about Autonomy and what sort of services do you think are going to be built on top of autonomous vehicles?

I view autonomy as a feature and as a component of different types of businesses and products. If you look at autonomy as a component or a feature in cars that people purchase at dealerships, then it is a convenience feature. It makes the car, you know, it's yet another luxury feature. And as you can see with Tesla and GM Super Cruise, we're already seeing some of that today. As it relates to ride sharing, it has an impact on Newton economics. So ride sharing companies live and die by dollars per passenger mile driven. And so if Autonomy can reduce their cost as it relates to dollars per passenger mile driven and increase their margins, then it's obviously very meaningful for them. So these are two very different ways of looking at autonomy. In the case of a automotive company, in the case of Ford, they're trying to see how they can minimize what it costs to add a feature into their vehicle and maximize how much a consumer would pay for that feature in their vehicle. That's very different from how a Uber and Lyft would look at Autonomy. And then there's a question for the Amazons, the Shopify, the doordashes, the instacarts. So unfortunately, when people use the word autonomy, they imply it's something monolithic, whereas I view it as a capability that has very different implications and very in different applications.

Do you think that we'll see different services? Because, you know, I'll go to sleep in my autonomous car and wake up in Vegas or something and they'll just be different use cases.

So I expect different use cases across different types of companies. And there will be new companies. So an Uber and a Lyft today they sell passenger miles. Their product to you is a passenger mile. And it's probably more amenable to a trip from, you know, your, your apartment to the coffee shop for, for a one hour meeting and then a trip from that coffee shop to another coffee shop. Of course, Uber and Lyft may also, you know, be able to offer the product where you go to sleep and you wake up in Las Vegas. But that may not be as easy for an Uber and a Lyft to offer than let's say another company is a new startup to offer that specializes in that kind of experience, that kind of product and going after that kind of customer. So there's going to be, to answer your question, the summary answer is that there's going to be significant impact with two existing companies that use Autonomy as a tool. And then there's going to be new companies that are going to be made possible and created through these technologies that are now available.

But I think a lot of what you're investing in, you know, feats of engineering, captures people's imaginations in good ways and bad ways. And I was wondering if you, you know, AI has a lot of potential, but it's scary to a lot of people. And so, you know, how, how do you address that sort of aspect when people say, look, you know, our jobs are going away because of automation, that sort of thing?

That's a very good question. So my response to that specific question on AI and jobs is that if you look at economies that have not embraced automation, it turns out that those economies also suffer from the most unemployment. That's just basic statistics. Whereas economies and countries that have adapted, have adopted automation, also have the lowest unemployment. And so it's my expectation that that trend will continue where more automation, yes, it does eliminate some jobs, but usually the jobs that are eliminated are jobs that are very difficult to fill. And it creates other jobs that are easier to fill and are more attractive. And you end up with a net effect of more consumption because the unit economics of whatever you're producing or whatever you're offering goes down. And as you've seen, whenever cost goes down, refrigerators got cheaper. Guess What? People have two or three refrigerators in their house. TVs got cheaper. Well, before we used to sit in the living room and fight over the remote control, and now there is a TV in every room and pretty soon in every bathroom. So when the cost comes down, there's going to be more consumption. And that goes back to the virtuous cycle conversation we're having earlier, which leads to more jobs, more demand, and then more jobs. So it's my expectation that more automation will create more jobs. But there is a catch to this. And the catch is that there needs to be education that's broadly available so that the existing workforce will be positioned to take advantage of or to take on these new jobs. And so I think the onus is on our educational institutions, our governments, to make sure that these and our existing employers, by the way, so the employer who is adopting this technology, I think the buck stops with them for them to make sure that their existing workforce is going to be trained to be able to have or take on these new jobs that are now available through automation and through technology. So a line worker, for example, who used to put life and limb at risk to put a piece of sheet metal in a 20 ton press is now operating a robot that does that well, they should be educated to be able to operate and debug that robot in the event the robot fails.

What about artificial intelligence? Run wild. And you know, we're going to be controlled by AI. That sort of the singularity is here. Any. Any pieces of that. That ring true to you?

Well, I hate to break it up, break it to you, but I feel like we're already being controlled by AI. I feel like a lot of us are already being controlled. Our happiness, our. Our interests are very much controlled by the AI that serves up Facebook and Instagram feeds. I feel like a lot of our behavior, a lot of our choices are very much driven by the AI that results in the Google search results that we see. And so I feel like that day has already come. We are already controlled by AI. Now, at least today, we feel like as if we're at liberty to control our own destiny. And we don't feel like we're under the iron grip of killer robots. Will that day come? I highly doubt it. But I am more concerned about where we're going today with AI, with where AI is and the way it impacts us today. So I wouldn't worry too much about the Armageddon about Terminators. What is it? What's the word that day? Judgment Day. I would be less concerned about Judgment Day in 2030 and more concerned about 2020, where AI has a level of impact that it does on us. I think a lot of it is in our control as to how we manage that and how we consume social media, how we consume the news, and how we go about finding information and making choices.

So you're saying a lot of that is on us, the individual consumer, user, as opposed to it's on us, sort of structuring our society differently.

I think it's still early. I think it's a combination of both. If there are systems in place where it becomes. Or there is a requirement that when you type in a search, there should be some way of you being told how much of the search result is influenced by someone. For example, the fact that the search results. If I type in tires for a BMW in the first search result is Continental, then I want to know, how did that research result become? Why is Continental first? So I think a level of disclosure coupled with consumer education, I think will address a lot of these concerns. And we saw that, for example, with markets back during the Great Depression and with the advent of securities laws, you can still to this day be duped into buying stocks. But it's more difficult for someone to dupe you from a legal perspective. And people today are far more educated today than they were, for example, versus those people that were buying railroad stocks in the late 1800s.

Okay, I think you talked about automation is necessary for us in like a manufacturing sense to stay competitive. What about much more on the desk worker and how does automation potentially improve our lives? I don't know if you've heard Elon Musk talking about meat flaps and we're all made out of meat. Do you know what I'm talking about?

Yeah. So I'm just as excited about automation in factories and cars as I am about automation for otherwise mundane desk or white collar tasks. And if you look at a lot of the great venture outcomes in the recent years, companies like snowflake companies like databricks, these are very much automation companies. They call themselves data companies or they're referred to as data companies. But they are reducing a lot of the work that someone has to sit down and manually do. And I expect them to be the first of many companies that we see that may be labeling themselves as something else, but they're very much automating tasks. And that's very much been the role of software from the advent of software. An algorithm is a sequence of steps that's used to automate a process. And so anywhere there's software, there's automation. One of the reasons why I decided to become an entrepreneur and later go into venture as an electrical engineer, was because I feared that my own job, which was sizing transistors and putting them together into a circuit to build an amplifier or to build a logic gate or to build a buffer or a filter that performs certain tasks. I thought to myself, man, this is going to get automated. And I've seen it before in other tasks of engineering. Engineering. There are people that walked around with slide rulers doing calculations. That was completely obviated by software in the 80s and 90s. And so it's my expectation that there's going to be a more rapid pace of the automation of these types of technical jobs. And the onus again is on the educators and the employers to keep people educated so that they'd be ready for the next kind of generation of jobs. I think the system of universities taking you in for four years, charging you tens now hundreds of thousands of dollars and putting you out there for the rest of your life, I think is an anachronism. But why is it that our educational system can get away with you not getting a job or you're not being able to pay your student debt, debt, you know, a few years after graduating. So it's my expectation it's going to be more and there's going to be more accountability on behalf of the educators and on behalf of the employers. And that's going to help our workforce be constantly ready for those new jobs that are being generated.

Your LinkedIn says San Francisco have you always been in LA since you joined Luxury?

The offices in Menlo Park? Before COVID I would be up there Monday through Thursday and some weekends. And since COVID I dialed that back to every other week because obviously there aren't as many in person meetings going on. However, I do expect, now that I'm married, I do expect to spend more time in la. I have a couple of boards that I sit on down here. The company is doing absolutely fantastic. I think that there is no shortage of amazing talent in la. There's no shortage of amazing leadership and entrepreneurial horsepower in la.

Anything else on Lux that I should make sure to cover here?

I feel like you covered it. Is there any other. Anything else that you're curious about or you think your listeners would be curious about?

I'm curious. If you were to start a company, what company would you start?

Good question. If I were to start a company. So there's a few areas that I've been tracking along the lines of how things are manufactured and the amount of automation and economies that are being brought to bear that would make it possible for a startup to compete in areas that until now have been dominated by large incumbents. So there's a couple that I've been thinking about in the semiconductor space and also in the manufacturing space. So still early on, but again, those are the kind of motivators that would make me excited about the next kind of Lux company.

Interesting. Is that the sort of thing that you would incubate yourself?

So if I'm fortunate enough, my preference is, is to find a person who would carry it. And in the case of Subspace, for example, which is an LA company, you can have a 50 gigabit per second connection cable at home, but still have an awful connection between Los Angeles and Austin, Texas. And I'm sure a lot of you have. I mean, I'm sure you've experienced this with video conferencing before COVID and it was an idea that was on my mind and I met an amazing founder, Bayan Tofield, who was in the process of selling his previous company, who had a track record of building companies in the networking and telecom space. And I was delighted to fund him and to partner with him and for this to be his baby, his vision to carry forward. So if I am fortunate enough to find a founder that is willing to take this on, that I'm 100% for partnering up with them. But if I'm less fortunate and can't find someone, then it's something that, you know, we as a firm would do in house.

Well, Shaheen, thank you so much for coming on the show today. And, you know, I wish you a lot of luck in accelerating humanity towards a brighter future. Keep doing that.

That's the plan. Thank you, Minnie. Sam.